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Enhancing Value Creation: Property Rights Theory in Oil Field Unitization

Explore the importance of property rights theory in value creation within the context of oil field unitization. Learn how this theory complements the Resource-Based View and addresses frictions in establishing property rights. Discover the implications for potential and realized value creation, limitations of RBV, origins of PRT, and the case of oil field unitization with its impediments and solutions.

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Enhancing Value Creation: Property Rights Theory in Oil Field Unitization

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  1. Resource-Based and Property Rights Perspectives on Value Creation: The Case of Oil Field Unitization Kim and Mahoney (2002) PresentedbyXiaCao

  2. Why isproperty rights theoryimportant？ • The Resource Based View (RBV) suggests that resources that are valuable, rare, inimitable, and non-substitutable (VRIN) increase the likelihood of value creation • Property rights theory (PRT) complements the resource-based view by relaxing the implicit assumption that resources are secure.

  3. Frictions in establishing property rights Potentialvalue creation Realizedvalue creation PRT RBV This paper examinesfrictionsthrough the example of oil field unitization.

  4. Property Rights Theory • Property rights are social institutions • Coase (1960) suggests that a resource should be seen as a “bundle of rights” • Alchian (1969) then clarifies this bundle • The right to appropriate • The right to use and change form • The right to transfer

  5. LimitationsofRBV • RBVmakes a simplifying assumption that property rights are secure • There are transaction costs (searching, bargaining and enforcement) • There are agency costs

  6. Why PRT works? • Property rights theory is in many ways more fundamental -The “right” determines the extent of the transaction costs and the agency problems -It defines the rights of stakeholders clearly • Thus property rights help in predicting the potential for value creation

  7. Origins of PRT • Coase (1960) introduced property rights into mainstream economics. Coase Theorem: given zero transaction costs, governance choice between different modes of resource allocation will not matter for economic efficiency. • Itsuggested that property rights are the reason why firms work

  8. The Case of Oil Field Unitization Oil field unitization is where a single firm is designated as the unit operator to develop/drill the oil reservoir as a whole.

  9. The Case of Oil Field Unitization • Importantvariablesforefficientextraction • therateofproduction • thelocationofthewells • Individualcompetitivedrillinggoesagainst • findingoptimallocation • maintainingefficientextractionrate • Therefore,oilfieldunitizationisthemostcompletesolution.Butwhyisthissolutionnotrealized?

  10. ImpedimentsofContracting • The length of the contract, the feature of a once-and-for-all contract, the requirement of site-specific investments with little economic salvage value, substantial uncertainty about behavior of contracting parties, and inherent risk involved in drilling for oil • Thepresenceofnegativeexternalities,informationasymmetry,anddistributionalconflicts,leadstosuboptimaleconomicresults(aprisoners’dilemmasituation)

  11. RBVandOil field unitization • Theoilfieldsatisfiesthefourcriteriaasasourceofpotentialeconomicrents (Peteraf, 1993) • resource heterogeneity • ex post limits to competition • ex ante limits • imperfect resource mobility • But RBV is not sufficient because • Who appropriates matters • Expectations change depending on feedback

  12. RBVinTermsofPRT • Thebundlesofpropertyrightspromisepotentialeconomicrents: • Clearlydefinedpropertyrightsarespecificindelineatingwhatutilizationarepossiblewithaparticularresource. • Intheessence,theprocessofmakingpropertyrightsmorepreciscanbeanotherwayoflookingatvaluecreationprocess

  13. Conclusion • The more valuable the resources, the more incentives there are to make property rights of resources more precise. • The more precisely delineated the property rights of resources, the more valuable resources become.

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